The Game Is Not Over For Facebook, Google In Russia (But There Is Work To Do)

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Russia, like China, is a market full of tech promise, but in the face of strong local competition, it is one that has also proven to be tough nut to crack for big U.S. companies looking for international growth.

But according to one IT leader in the country — Alexander Turkot, executive director of the IT Cluster at Skolkovo, Russia’s multi-billion dollar Silicon Valley-like work in progress — the game is not over for the likes of Facebook and Google. In a briefing this morning, he also had some good insights into what is happening in early-stage investing in the country, and what Russian startups need to be doing to get ahead.

The search market is still largely dominated by Yandex, which as of this month has a 61.3 percent share of all searches to Google’s 24.9 percent, according to LiveInternet. Mail.ru is the third-largest with an 8.5 percent share. In web mail, Google doesn’t even make the top-ten providers, with mail.ru holding over 90 percent of the market.

But there appears to be a sign that Google is looking to redouble its effort in the country, perhaps as a route to growing a more local operation that can better tackle the market here.

According to Turkot, Google may soon also be joining other Western companies like Microsoft, IBM and Intel in the Skolkovo initiative.

Turkot notes that Eric Schmidt, Google’s chairman and ex-CEO, already sits on the board of directors of Skolkovo, and “our guess is that sooner or later Google is going to start [at Skolkovo].” Ironically, he added that Google’s other obvious Russian connection, co-founder Sergey Brin, has almost worked in the “opposite direction” for Google doing more in Russia. “Sergey’s memories of Soviet Russia do not help us much with Google,” he said.

Facebook, meanwhile, has an arguably bigger challenge ahead of it. The social network currently only has less than five percent market share in the country, according to figures from LiveInternet, with Vkontakte leading the market with a 63.6 percent share this month, and Odnoklassniki at 13.8 percent.

Turkot says that the best thing for Facebook to do, if it wants to get serious about entering a market like Russia, is not to invest in existing rivals (or try to acquire them outright) but to focus on building up its own business in a more locally-focused way.

“Facebook as a platform has a lot of technology,” he said, and that needs to be used to make investments not in basic socializing — “not an attraction any more in Russia” — but in media and content partnerships.

This would also help it chase business that its main competitor, Vkontakte, has been cornering at the moment. Whereas three years ago Vkontakte “was a complete copy” of Facebook, now it has become more content-oriented — sometimes illegally, but always with a lot of traction, bringing in close to a billion dollars in revenue in the process.

Turkot speaks from experience: one of his past role was as the head of Myspace in Russia, a project he says failed for two reasons: not enough local content and a simple fact of being late to the market.

Some other interesting points from our meeting earlier today:

Angel investing, seed rounds, grants. This is still in its early stages in Russia, Turkot says. There has been some development in early-stage funding — for example Yuri Milner and Pavel Durov’s StartFellows project, giving ‘no strings attached’ grants of $25,000 to select early-stage companies, with Milner in Moscow just last weekend to promote the program. And Skolkovo is also offering grants of up to $50,000 to companies, with an annual budget of $50 million and last year distributing some $45 million in grant money. These too are not investments.

However, by and large what passes for angel investment here is discouraging, Turkot says. “There is no culture of seed or angel money available here yet,” he said. “You cannot call it a civilized market when an investor wants to take a 45 percent share in a business in return for a $60,000 investment. They’re killing the business and the idea if from the first round they take control of the business right away.”

He seems frustrated, too, that Skolkovo hasn’t done more in this area. He says when he came on board to run the IT cluster, the question of whether Skolkovo should also consider investing in projects was still being considered. So the moment, Skolkovo can only give grants, with the only hope of influence on a project being a slow release of funding with goals set throughout the process.

That’s something Turkot says he will be looking to change soon, by getting involved in investing himself. He says that this is a recent development: permission was only granted “a week ago” for those involved in Skolkovo to invest money directly into Skolkovo startups. He cannot be a general partner in any investment vehicle but he will be able to contribute. He says this is an important thing to do: “It’s a public show of my approval, that I believe in what I do,” he says.

And if it’s not already clear: this is also a signal to investors from abroad that there may be a lot of opportunity in angel investing here.

The rise of “me-too” tech projects. One area where Skolkovo will not invest under Turkot is in “me-too” startups, effectively recreating what has been done already. For example, no more social networking sites, he says. “I personally believe that one big social network is enough. It used to be Myspace and now it is Facebook,” he says (notwithstanding the fact that there is still more growth to be had in countries like Russia).

Act locally, think globally. Turkot says that Russia is still trying to recover from the “brain drain” that took place just before the end of the Soviet Union and subsequent years, where talent either left to pursue work in the U.S. and other countries like Israel, or left the field of tech altogether to go into more “prestigious” areas like banking, law and medicine.

This is something that still needs to be repaired, he said. But although he wants a better national culture for tech innovation, he says that when it comes to startups their ambitions should be anything but national — unless they are solving a specific Russian need around an area like biomedicine. Nationally-focused tech startups, he says, are dead-ends and need to set their sites further afield if they want to succeed, so this is a chief criteria for when he is assessing Skolkovo grants.